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My brother's friend lent him GTA IV, and I installed it to our Xbox 360. Since it is his friend's game he will ask for it back, so I'm wondering if the DVD drive can read enough of a burned copy or recognize enough of it or something and launch the installed copy?

Yeh I'd go for an xkey then.
Benefit is the ability to use an external harddisk as storage.
Drawback is the initial cost.

But if your Slim is old enough (which I think it is) extracting the DVD key is incredibly easy.
Just hook it up to a SATA port (if you got a compatible SATA chipset) and dump the keys in Jungleflasher.
Or bring it to a modshop and let them dump the keys + install the Xkey ;]